Budget 2013: What George Osborne should do to help small businesses and get Britain moving again

On Wednesday, George Osborne should use his Budget to kick-start the UK’s small business economy. Despite several Government attempts to get the banks lending to small and medium-sized Enterprises (SMEs) - thereby helping them grow out of a prolonged recession - no progress has been made towards a goal that grows ever more important to the future of our economy. What we need urgently need is a change of approach.

One of the major
concerns for the Government is how to get money directly into the economy to
jumpstart growth and create jobs, hence the constant search for infrastructure
projects that are ‘shovel-ready’.

But few projects are
more ready for funding than the many small businesses that are seeing requests
for finance rejected or put on hold by banks.

These are often small,
well-run companies eager to buy new equipment and take on new staff. This kind
of activity from smaller firms is what will drive growth over the next few
years. As Ed Miliband said in his speech last week to the British
Chambers of Commerce: “Jobs in the future are not going
to come from a small number of large firms but a large number of small firms”.

Previous Government
lending programmes like Funding for Lending (FLS) and Project Merlin have not
been effective. Trying to force the banks to lend at a time of deleveraging and
institutional risk-aversion simply makes no sense. While these schemes try to
encourage banks to make more loans, at the same time new EU regulations force
them to hold more capital.

Mr Osborne should stop
trying to force a square peg into a round hole and stop giving the banks money
that they can’t, or won’t, channel to the small companies that need it.

One idea likely to
feature on Wednesday is Vince Cable’s British Business Bank which will offer
long-term funding to manufacturers, exporters and growth companies. We’re still
short on details, but creating another bureaucratic behemoth like RBS would be
inadvisable, and take months if not years to set up. The German ‘Sparkassen’
model of regional banking networks, with local bank managers taking decisions
on businesses they know well, might sound good in theory - but in reality will
take a long time to come about, and even longer to make a difference.

Meanwhile the private sector
has produced a number of innovative new finance providers.
Internet platforms such as MarketInvoice,
Crowdcube and Kickstarter; challenger banks such as Metro Bank and Aldermore;
and even corporate players such as the Co-op and Community Development Finance
Association are all specialising in specific financial solutions such as
working capital or early-stage equity. George Osborne and Vince Cable should
use the opportunity on Wednesday to turbo-charge these new players into the
mainstream.

Alternative finance
represents a new nimble ecosystem for small business finance,
offering growing UK SMEs options as to how they fund their business. Last
year saw nearly £250 million channelled through alternative finance platforms
and this stands to grow substantially in 2013 and beyond. Last year also saw
the launch of the Next Generation Finance Consortium, which
aims to promote a broad church of new funding providers.

The current lending
environment - in which five high-street banks control 85 per cent of business finance -
is dangerously inefficient. Nearly all these banks offer the same finance
products and there is no incentive to innovate. Small businesses should be
given real options in how they choose to fund themselves. The Government
should ensure a Business Bank does not crowd out private sector innovation and
instead start to embrace it.

Rather than further
concentrate power in the hands of the loss-making broken banks, George Osborne
needs to let a thousand funding flowers bloom. Only by showing reluctant
bankers that the Government is prepared to find another way to reach SMEs will
the incumbents sit up and raise their game. It would be a shame to miss another
opportunity to get Britain moving.